MNI PREVIEW: Guidance Key At BOE MPC December Meeting

The Bank of England will likely leave policy unchanged on December 17 holding a line between rising Covid-19 infections, the roll-out of vaccinations and ongoing trade talks between the UK and the European Union.

The Monetary Policy Committee will steer clear of saying or doing anything that pre-judges the outcome of the trade negotiations. If talks subsequently break down the MPC would have no difficulty, as it did in March when the Covid-19 crisis hit hard, in holding a special meeting, with forward guidance and quantitative easing topping the tried and tested policy options if action is required.

Addressing what action the Bank could take if there was no trade deal, Governor Andrew Bailey said last week the Bank's March response to market disruption, when policy was changed across two special non-scheduled meetings, was "a benchmark", as he also underlined the scale of the BOE's remaining armoury.

Even without acting, the MPC could make clear at this week's meeting that it is prepared to deliver more stimulus without acting, following the template from June 2016 when, in the aftermath of the Brexit referendum, policymakers stood pat at the July meet but made it crystal clear stimulus was coming in August.

WORK IN PROGRESS

Negative interest rates remain a work in progress, despite the Bank's potential implementation consultation with banks ending on November 12. The BOE chose not to publish any results of the talks alongside the December Financial Stability Report and as MNI reported (LINK) it is far from certain that the negative rates analysis will see the light of day this year.

Having just raised the target stock of government bond purchases, by GBP150 billion to GBP875 billion in November while planning to carry them out at a gentle pace initially, the easiest move is for the MPC to signal it stands ready to step up the pace of purchases if required.

Another option would be to rejig the details of its term funding scheme, its channel for providing cheap funding to smaller firms, by lowering the interest rate on it from just above to below the 0.1% Bank Rate, although such a move is fraught with technical difficulty.

The idea was floated by external MPC member Michael Saunders earlier this month, although he noted that "if the TFS interest rate is below Bank Rate, then banks could borrow funds at the (lower) TFS rate and earn the (higher) interest rate on reserves," with the BOE providing a banking subsidy at its own expense unless new restrictions were applied.

The widespread expectation is that this time around the MPC will sit tight, with new tools being readied and refined for further action at a future date.